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transposition mystery solved!

One other thing I thought of to try was to plug in Kontakt 2 as a VST - I usually plug in as a DXI - that did it!!! In fact, I opened a brand new project, had one instance as a DXI, the other as a VST and the VST transposes (as it should with the key+) and the DXI does not - in the very same project!

I don't know what difference it will make overall, opening in VST instead of DXI, but that made the difference in being able to use the transpose keys.

I guess it isn't really solved, since there is still the problem in the DXI, but it is one step closer. I am curious as to what format the readers of this forum use the Kontakt player.